Brian Hunter made more money in a single month than most folks make in their lifetime... But he also caused one of the biggest hedge-fund blowups in history.
What a 'Winning' Strategy Without Risk Management Looks Like
By Marc Chaikin, founder, Chaikin Analytics
Brian Hunter made more money in a single month than most folks make in their lifetime... But he also caused one of the biggest hedge-fund blowups in history. You see, Hunter was a commodities trader. But he wasn't like the typical, brash Wall Street types. He grew up in farm country near Calgary in Canada. He was quiet and kept to himself. But Hunter loved crunching numbers. And he was good at it. In college, Hunter majored in physics. Then he got a master's degree in mathematics. That gave him a major advantage over his future colleagues in the financial markets. Soon after he graduated, he put his educational background to work. He joined the natural gas futures trading desk at a Calgary-based company called TransCanada (now called TC Energy) in the late 1990s. TransCanada was an emerging player in the energy transmission business. It focused on transporting natural gas across North America. Hunter quickly learned the fundamentals of the natural gas market. His experience at TransCanada prepared him to become one of the most profitable energy traders in the world. In 2001, Hunter joined the natural gas trading desk at financial-services giant Deutsche Bank (DB). And he took off... During his first year, he made the bank $17 million. The next year, he tripled that figure to bring in $52 million. By 2003, he headed the natural gas trading desk. His division was poised to have another big year, but disaster struck... In December 2003, natural gas prices went in the opposite direction of where he bet. They went higher instead of lower. It cost his desk – and the bank – more than $51 million in losses in a single week. Hunter blamed the losses on Deutsche Bank's electronic-trade-monitoring and risk-management software. He said it stopped him from exiting bad trades early, which could have mitigated the losses. The next year, Hunter left Deutsche Bank. It didn't take him long to find a new job. But at his new firm, poor risk management and bad speculating eventually led to a colossal blowup...
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Risky Bets Paid Off... Until They Didn't
A former natural gas trader at Goldman Sachs (GS) hired Hunter to work at the energy desk at a Connecticut-based hedge fund called Amaranth Advisors. At first, Amaranth kept Hunter on a tight leash. The firm knew about his big swings at Deutsche Bank. But Hunter was a pro. He and his group steadily brought in 20% to 40% annual returns. So Amaranth gave him more leeway to make trading decisions. In 2005, Hunter saw an opportunity in his main market – natural gas... Oversupply had driven natural gas prices down, which he thought was unsustainable. And he expected prices to rise. So he bought millions of dollars' worth of options at bargain prices. Then, Hurricane Katrina slammed into the southeastern U.S. Hurricane Rita followed not long after. The two storms devastated America's oil and gas production and transportation in the Gulf region. And natural gas prices soared. Hunter's bets on natural gas paid off massively. He made $1 billion for Amaranth that year. That earned him a nine-figure bonus. Hunter's hot streak continued into 2006. By April of that year, he helped Amaranth amass a roughly $2 billion profit. He was so "bullish" on natural gas prices for the winter that he made huge leveraged bets. And he managed to get around Amaranth's position-size limits. He used swaps and derivatives to hide the true size of his positions. Since Hunter had brought in so much money for Amaranth, the firm didn't closely watch him. Amaranth also allowed him to move closer to home to his own office in Canada. Then, things unraveled... An unexpectedly warmer winter sent natural gas prices plummeting. Hunter was sitting on billions of dollars' worth of options and derivatives on natural gas. And these were bleeding millions every time natural gas prices fell by even a single cent. He made such big bets that they were too large to get out of if the market turned. Eventually, Amaranth was in the hole for $6.6 billion – all thanks to Hunter. The firm imploded. Hunter singlehandedly caused the collapse of one of the world's largest and most successful hedge funds. Put simply, it was because of his overleveraged, one-way bet on natural gas in 2006. Spectacular busts like Amaranth aren't a regular thing on Wall Street. But they teach us a valuable lesson... Losses like this can happen if money managers don't have the tools they need to manage risk and exposure in the markets. That's true for individual investors, too. So make sure you have the proper tools – and a plan – to manage risk. The Power Gauge makes it clear when a trade has turned against us. And that means that unlike Hunter, we won't be riding our portfolios to zero. Good investing, Marc Chaikin
Marc Chaikin: 'Ask Me Anything'
In August, Marc Chaikin is doing something he has never done before. After a wild six months for stocks, Marc knows you may have many lingering questions. So, he'll be going on camera – NOT to discuss a specific opportunity, but instead to devote his time to answering YOUR most pressing questions.
But to do that, we need to hear from YOU. If something is keeping you up at night (whether it worries or excites you), we want to hear from you. Marc will answer as many questions as possible during his "Ask Me Anything" event next month.
— According to the Chaikin Power Bar, Small Cap stocks and Large Cap stocks are Bullish. Major indexes remain all bullish.
* * * *
Sector Tracker
Sector movement over the last 5 days
Information Technology
+1.59%
Industrials
+0.7%
Real Estate
+0.26%
Consumer Staples
0.0%
Communication
-0.02%
Utilities
-0.24%
Financial
-0.38%
Consumer Discretionary
-0.52%
Energy
-2.33%
Materials
-2.45%
Health Care
-2.64%
* * * *
Industry Focus
Bank Services
68
27
3
Over the past 6 months, the Bank subsector (KBE) has underperformed the S&P 500 by -4.27%. However, its Power Bar ratio, which measures future potential, is Very Strong, with more Bullish than Bearish stocks. It is currently ranked #4 of 21 subsectors and has moved down 1 slot over the past week.
Top Stocks
ABCB
Ameris Bancorp
AX
Axos Financial, Inc.
ASB
Associated Banc-Corp
* * * *
Top Movers
Gainers
SNA
+7.92%
ALB
+7.57%
PEP
+7.45%
AMTM
+5.15%
ALLE
+5.11%
Losers
ELV
-12.22%
ABT
-8.52%
MOH
-5.47%
OMC
-4.31%
IPG
-4.25%
* * * *
Earnings Report
Earnings Surprises
TRV The Travelers Companies, Inc.
Q2
$6.51
Beat by $2.90
GE General Electric Company
Q2
$1.66
Beat by $0.23
IBKR Interactive Brokers Group, Inc.
Q2
$0.51
Beat by $0.04
PEP PepsiCo, Inc.
Q2
$2.12
Beat by $0.09
USB U.S. Bancorp
Q2
$1.11
Beat by $0.04
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